Private power can energise states

Australia has a track record of unlocking value through energy market reform. The structural separation of contestable generation and retail businesses and the national regulation of natural monopoly network assets have delivered – according to Australian Bureau of Agricultural and Resource Economics estimates – a permanent increase in real gross domestic product of $1.5 billion a year.

But while Australia has undoubtedly come a long way since the days of single, vertically integrated utilities under full government ownership, stark differences remain between the states in respect of ownership, efficiency, price competitiveness, and overall energy sector performance.

Many states still retain significant public ownership in generation and absolute monopolies on distribution and transmission, and continued state ownership in these sectors is contributing to higher usage costs for Australia’s households and businesses. In addition, requiring taxpayers to make massive capital investments into ageing networks is not the most socially beneficial allocation of public capital.

Governments should now begin the full privatisation of the remaining state-owned generation assets, and must also consider the benefits of privatising transmission and distribution networks (which, outside Victoria and South Australia remain 100 per cent state-owned).

The experience in Victoria and South Australia demonstrates that the private sector is better at ensuring appropriate network investment and efficient capital management, with the result that network costs per customer have been consistently and considerably lower in those states.

If we compare price increases in the competitive, fully privatised Victorian electricity sector with those in NSW, we see that from 1995 to 2010 prices in Victoria rose by 35 per cent in real terms, while in NSW they rose by close to 70 per cent.

In part, this divergence has been caused by over-investment, with capital expenditure per customer in NSW double that in Victoria over the 2005-10 regulatory period. As transmission and distribution costs account for about half of a standard electricity bill, the impact of inefficient network expenditure on consumers is clear. In considering these capital expenditure figures, the Garnaut review noted that state government owners were incentivised to over-invest due to the returns able to be derived from their low cost of borrowing and tax allowances, and also due to the fear of political consequences from network failures.

Evidence suggests private operators, in contrast, are able to deliver a higher-quality service with lower capital expenditure, leading to improved pricing outcomes.

Related Quotes

Company Profile

But applying downward pressure to prices is not the only benefit of network privatisation.

The considerable proceeds from asset sales – and the avoidance of future capital injections – will create extra capacity on state balance sheets. In NSW alone, public expenditure on network investment over the next four years is forecast to be $16.5 billion, more than a quarter of the state’s total state infrastructure investment.

The headroom created by avoiding imminent expenses of this type would help tackle the big infrastructure investment task Australia faces as a nation. The effect on productivity is tangible, with the PwC Productivity Scorecard reporting that in the year to June 2011 national labour productivity growth was a mere 0.4 per cent.

To ensure Australia’s sustained competitiveness and productivity, various commentators have suggested that an infrastructure expenditure of between $455 billion and $770 billion is required in the near term. Given the size of the required infrastructure spend and the states’ constrained balance sheets, the focus should now be on redeploying the finite public capital that we have by withdrawing it from existing assets and using it to fund new projects.

This recycling of public capital would ensure the nation’s infrastructure stock is perpetually expanded without increases in state debt and the resultant impact upon state budgets. Reinvesting the proceeds from electricity infrastructure sales into tangible new infrastructure projects would also assuage concerns that profitable state assets are being divested for no net public benefit.

NSW and Queensland, in particular, have before them an opportunity to free up considerable capital for productivity-boosting infrastructure.

Infrastructure Partnerships Australia estimates that full privatisation of NSW’s distribution and transmission networks could generate between $29.2 billion and $34.5 billion, with full privatisation of the state-owned generation assets adding an additional $3.3 billion to $6.5 billion.

The list of priority projects in NSW that could be funded with these proceeds is long, and could include the North-West Rail Link, M4 East, M5 East Duplication, F3 to M2 connection, or a new northern beaches hospital.

Similar asset sales in Queensland could potentially fund a second river crossing for rail or the completion of the Bruce Highway.

With the inherent inefficiencies and mounting liabilities in state-owned generation, transmission and distribution assets, increasing usage charges on consumers and a growing backlog of critical infrastructure projects requiring funding, it is clear a new and final wave of electricity reform is crucial to unlock the value of the states’ electricity assets, drive price competition, and fund the next generation of productivity-enhancing infrastructure.